ISLAMIC FINANCE
While developing economies are aligning with regional partners to achieve sustainability, developed economies face their own challenges in building confidence for sustained investments. This includes securing long-term trust in their policies and identifying assets to combat inflation and avoid what appear to be imminent recessions.
Wars in the last few decades have torn through fragile economic facades. Conventional banking, with its interest-based products, has ensnared a massive bundle of struggling finances, representing organisations and states, now gasping for breath.
Islamic banking, in an environment as catastrophic as this, has shown resilience, flexibility and an amazing appeal to the unbanked. It has reached out to the sceptics and is poised to significantly influence the economic trajectories of developing nations over the next decade. As developed economies reevaluate their financial systems in light of recent global challenges, Islamic finance -- anchored in ethical principles, risk-sharing and asset-backed transactions -- offers a compelling alternative that aligns with the aspirations of many emerging markets.
Pakistan's initiative to transition the entire banking system to Islamic principles by 2028 highlights the growing appeal of Shariah-compliant finance in Pakistan too. Pakistan, being an Islamic Republic, has had the justification of using Islamic instruments in commerce since its inception. However, the nascent challenges and foreign policies dictated the utilisation of conventional tools to compete globally. The success of Mit Ghamr and the subsequent rise of Islamic financial tools saw Islamic Banking coming to Pakistan towards the end of the last century. Its rise in the 21st century is no secret, and this move aims to enhance further financial inclusion, particularly among populations previously hesitant to engage with conventional banking due to religious considerations.
Pakistan's Islamic banking sector has emerged as a powerful force for financial inclusion, successfully drawing millions of previously unbanked citizens into the formal financial system. The elimination of interest-based transactions (Riba) has proven to be the decisive factor, overcoming deep-seated religious and cultural barriers that kept many Pakistanis away from conventional banking.
This transformation is evident across Pakistan's financial landscape, where Islamic banks are expanding both their digital footprint and physical presence at an unprecedented rate. The most striking example is Faysal Bank's conversion from conventional to Islamic banking - the world's largest such institutional transformation. Since its conversion, Faysal Bank’s branch representation has increased dynamically to over 855 locations, demonstrating not only the viability but also the explosive growth potential of Shariah-compliant banking.
Let me quote from a recent international report, ‘Islamic Banking for Financial Institutions: Unlocking Growth Amidst Global Shifts’. The report projects that global Islamic finance assets will reach “$7.5 trillion by 2028, up from $5.5 trillion in 2024, reflecting the expanding relevance of Shariah-compliant finance globally.”
The next decade presents an opportunity for policymakers, financial institutions and stakeholders to harness the potential of Islamic finance in fostering inclusive and equitable economic growth in Pakistan
Considering the global perspective, Islamic finance assets have shown remarkable growth. Christine Lagarde, former managing director of the IMF, highlighted the potential of Islamic finance to foster inclusive growth by increasing access to banking services for underserved populations.
In Africa, where a significant portion of the population remains unbanked, Islamic finance presents an opportunity to bridge the financial inclusion gap. An IMF Working Paper noted that in Sub-Saharan Africa, only one in four adults has a formal bank account, and religious reasons contribute to the low usage of formal financial services. Islamic finance's emphasis on ethical investments and avoidance of interest resonates with many in the region, offering a pathway to greater financial participation.
Indonesia, the world's largest Muslim-majority country, has been leveraging Islamic finance to drive economic growth. Rosy Widyawati, director at Indonesia's Ministry of National Development Planning, emphasised the potential of the Shariah economy, stating, "The Shariah economy offers a new avenue for growth that holds substantial potential, which we need to harness collectively”. The country's strategic focus includes integrating Islamic finance into national development plans, promoting ethical and sustainable economic growth.
The World Bank recognises the role of Islamic finance in addressing global challenges. Senior Managing Director at the World Bank Axel van Trotsenburg highlighted the potential of Islamic finance to contribute to the Sustainable Development Goals, noting that it can effectively reach underserved populations and support climate resilience initiatives. He cited examples such as the issuance of green Sukuk in Malaysia and Indonesia, which finance projects in renewable energy and sustainable agriculture.
The ethical foundations of Islamic finance, including the prohibition of interest (Riba) and emphasis on profit-and-loss sharing, align with the principles of social justice and equitable wealth distribution. These principles can contribute to macroeconomic stability by discouraging excessive risk-taking and promoting investments tied to real economic activities. A study published in the Journal of Islamic Accounting and Business Research found that Islamic finance contributes to economic growth, particularly in Muslim-majority and developing nations.
As Islamic finance continues to gain traction, its role in shaping the economic landscapes of developing countries becomes increasingly significant. By offering financial solutions that align with cultural and religious values, Islamic banking has the potential to enhance financial inclusion, support sustainable development and contribute to more resilient economies.
The next decade presents an opportunity for policymakers, financial institutions and stakeholders to harness the potential of Islamic finance in fostering inclusive and equitable economic growth in Pakistan. The best approach to deliver this will, however, remain open to suggestions and deliberations as per the rules of Islamic economics.
The writer is the president of the Pakistan Businessmen and Intellectuals Forum (PBIF). He tweets/posts MianZahidHusain